Legislation authored by Rep. Nydia M. Velázquez (D-NY) aims to significantly strengthen reporting requirements for hedge funds, large privately organized, pooled investment vehicles not available to the public whose primary investors are wealthy individuals or institutions.
H.R. 3921, known as the “Hedge Fund Sunshine Act,” comes as media reports repeatedly link hedge funds to the ongoing financial crisis in Puerto Rico.
“It has become increasingly clear that hedge funds, which have purchased a sizeable part of Puerto Rico’s debt, are exacerbating the crisis and profiting from the island’s misery,” Velázquez said.
“This bill will allow regulators and the public to see exactly what role these funds are playing in Puerto Rico’s financial crisis and in our broader economy,” the Puerto Rican stateside lawmaker said in a statement released Thursday.
Current regulations require hedge funds to file with the Securities and Exchange Commission when they acquire ownership of more than 5 percent of a class of equity securities. Velázquez’s bill would lower that threshold to 1 percent, providing the public and the SEC with a better sense of funds’ holdings and financial positions.
In addition, her measure would institute a new quarterly reporting requirement for all securities — both debt and equity — in which funds hold a 1 percent or greater ownership stake. This would mean that, for the first time, these funds would publicly report on their larger debt holdings, such as the significant stake many funds are suspected of holding in Puerto Rico’s debt.
These requirements would also take into account derivatives like options and swaps, financial instruments often used to skirt reporting requirements.
“Hedge funds constitute a $3 trillion industry with enormous impact on capital markets, corporations, local governments and, ultimately, working families’ lives,” Velázquez noted. “Yet, due to loopholes in existing law, they operate largely in the shadows, avoiding scrutiny.”
Estimates range widely as to how much of Puerto Rico’s debt is currently held by hedge funds, but there seems to be consensus that the industry’s role is significant. Some media outlets have suggested hedge funds could control as much as 50 percent of the island’s financial obligations.
Through this outsized role, many funds have been pushing for greater austerity managers and against extending bankruptcy protections to the island.
“Rather than working to help resolve Puerto Rico’s financial crisis in a fair, orderly fashion, these funds are lobbying to cut basic services that 3.5 million American citizens in Puerto Rico rely upon,” Velázquez said. “It is time we take a clear-eyed look at the effect these funds are having on Puerto Rico and on other parts of our nation’s economy.”
Velázquez’s bill received wide support from a range of advocacy and labor groups including: Americans for Financial Reform; AFL-CIO; AFSCME; Make the Road New York; Strong Economy For All Coalition; Center for Popular Democracy; and Hedge Clippers.
The bill, which is being introduced this week, is expected to be referred to the House Committee on Financial Services, of which Velázquez is a senior member.
“From the auto manufacturers to Puerto Rico, we’ve seen time and again that hedge funds often prey on and profit from financially distressed entities,” Velázquez said. “By giving the public and regulators a better sense of hedge funds’ activities, we can finally begin holding this secretive industry accountable for its actions.”